Mnuchin's talk of tax plan 'soon' stirs markets and skeptics

(Bloomberg) Treasury Secretary Steven Mnuchin sent U.S. stock prices to a daytime high Thursday when he said the Trump administration will produce an ambitious plan to overhaul the U.S. tax code “soon.”

But it’s not the first time the administration has promised an imminent plan, and the obstacles to a sweeping tax-code rewrite of the sort Mnuchin described Thursday haven’t gotten any smaller. A key Senate committee has yet to see final details of a White House plan, a congressional aide said. And tax-related challenges presented by the 2010 Affordable Care Act remain in place amid Republicans’ disagreement on how to dismantle the health-care law they’ve criticized for years.

On top of that, House Speaker Paul Ryan’s proposal to tax U.S. companies’ domestic sales and imports—while exempting their exports—has stirred controversy among U.S. businesses, created conflict among Republicans and has yet to win President Donald Trump’s endorsement.

Treasury Secretary Steven Mnuchin
Andrew Harrer/Bloomberg

So even as stock traders welcomed Mnuchin’s pledge to enact comprehensive tax legislation before the end of this year, skeptics questioned the prospect.

“Clearly they’re saying what they’d like to believe is true,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a progressive policy group in Washington. “We now know that we must heavily discount their assertions,” said Bernstein, who served as former Vice President Joe Biden’s chief economic adviser.

‘Lack of Agreement’

“The lack of agreement on the desired direction for tax reform casts doubt on whether it can be done this year,” said Alan Viard, a senior scholar at the conservative American Enterprise Institute. “But I suppose end of year is still possible, if they can coalesce around something reasonably soon.”

During a conference Thursday sponsored by the Institute of International Finance, both Mnuchin and Gary Cohn, President Donald Trump’s top economic adviser, raised expectations for significant tax legislation before the end of 2017.

“Just to be clear: We hope this won’t take til the end of the year,” Mnuchin said. Of the administration’s plan, he said: “We’re pretty close to being able to bring forward what is going to be major tax reform.”

In February, during a meeting at the White House with U.S. airline executives, Trump said: “We’re going to be announcing something I would say over the next two or three weeks that will be phenomenal in terms of tax.” That was 10 weeks ago.

Because Republicans in Washington generally agree that tax rates for businesses and individuals should be cut, many saw Trump’s election—which gave their party control of Congress and the White House—as a sign that their goals were in reach.

They still may be. “You don’t need a detailed plan in April to have legislation passed by the end of the year,” said Martin Feldstein, an economics professor at Harvard University. “They are working on their ideas.”

Congressional Contact

Both Mnuchin and Cohn said the administration is staying in contact with Congress about its plans. But while the Senate Finance Committee has maintained open lines with the White House, it hasn’t yet received final details of a plan, said a Republican committee aide.

In the Senate, the GOP’s majority is thin—the party controls just 52 of the chamber’s 100 seats. Normal Senate rules impose a 60-vote threshold for legislation to escape potential filibusters from opponents. Senate Republicans could use a process known as budget reconciliation, which would allow for passing a tax bill with a simple majority. But under that process, any legislation that added to the deficit would have to be set to expire after 10 years.

Mnuchin said Thursday that administration officials hope any tax legislation will be bipartisan, “but if it’s not, we’ll go through the reconciliation process.”

Cohn said the administration wants a permanent tax overhaul—especially for businesses. Delivering that will require finding ways to pay for cuts in tax rates. Trump campaigned on proposals to cut the corporate tax rate to 15 percent from 35 percent, and to cut the top individual income tax rate to 33 percent from 39.6 percent.

While those proposals are in flux—and the rates in Trump’s ultimate plan may vary—it’s unclear how the administration will propose to pay for such rate reduction.

Border Battle

Ryan’s call for a border-adjusted tax on companies’ domestic sales and imports could help with that problem. Independent analysts have estimated that it would raise more than $1 trillion in new revenue over the coming decade, helping to pay for cuts.

But retailers, carmakers and oil companies that rely on imported goods have mounted intense opposition to Ryan’s border-adjustment concept. Trump has yet to make his position on it clear.

“There are certain things we like” about the border-adjusted tax, but “there are certain things we don’t,” Mnuchin said. He cited concern over currency adjustments that underpin the proposal. Proponents of the tax say the U.S. dollar would rise 25 percent to offset the higher price of imported goods.

“If the currency does correct in a much stronger currency, then that hurts our exports, if the currency doesn’t correct, we have price appreciation and inflation particularly in consumer goods, then that’s a concern,” he said. “We’re working with the House and having discussions on the specifics of it.”

Health-Care Disagreement

Another potential hurdle is the 2010 health care law known as Obamacare, which imposed new taxes on high earners. Republicans, including Trump, have said that by repealing the law—and its expansion of the Medicaid program that provides health coverage to low-income people—they could scrap several taxes that would amount to almost $1 trillion over a decade. That would set the official revenue baseline lower—making it easier to achieve a revenue-neutral tax plan.

But the White House and congressional leaders have been unable to agree on a clear strategy for moving forward on health legislation. Mnuchin brushed aside the concern Thursday. “Whether health care gets done or doesn’t get done, we’re going to get tax reform done,” he said.

That may leave any administration proposals heavily dependent on “dynamic scoring” to achieve revenue neutrality. Under dynamic scoring, a tax plan’s revenue effects are considered in the context of the plan’s impact on economic growth and consumer well-being. The process can be controversial—economists disagree on the best ways to predict such effects—but Cohn and Mnuchin both emphasized the use of the technique.

“Using dynamic scoring may allow us to get to a permanent solution” on the tax overhaul, said Cohn, the director of Trump’s National Economic Council.

Edward Kleinbard, a tax law professor at the University of Southern California and a former chief of staff for the congressional Joint Committee on Taxation, questioned that claim. Kleinbard noted that funding for the federal government is set to expire on April 28, forcing federal lawmakers “to focus on the consequences for the federal debt of just cutting taxes, against the unsubstantiated promise of higher growth.”

“We already have the second lowest-taxed large economy in the world; if the growth fairy nonetheless does not dwell among us, why would unprecedented deficits be an irresistibly hospitable environment for her to alight?” he said in an email. “And yes, I talk like that.”